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 With less than two weeks to go, a YouGov survey for the Sunday Times
put the "Yes" to independence campaign at 51 percent against the
"No" camp at 49 percent, overturning a 22-point lead for the
unionist campaign in just a month.
The pound is center-stage in the debate. Scottish First Minister
Alex Salmond says Scotland will share the pound while Westminster
has ruled it out, stoking uncertainty about the currency, debt and
sharing of North Sea oil revenues.
Until late last month, most investors, including hedge funds, have
been factoring in only a slight chance that Scotland will leave the
three-century-old union. But with the tightening of recent polls
indicating that Scotland could be inching towards independence, many
investors are increasingly jittery.
The referendum is to be held on Sept. 18.
Sterling fell more than 1 percent against the dollar, to hit a near
10-month low of $1.6104. It was also down 1.2 percent against the
euro, with the single currency at 80.37 pence, its highest in four
weeks.
"The FX market also has some catching up to do. So far hardly any
uncertainty about the outcome of the referendum had been priced in,"
Esther Reichelt, currency strategist at Commerzbank, said. "Over the
next two weeks we should all be prepared for increased volatility in
sterling exchange rates."
The weakness in the pound -- it has shed over 2.5 percent in the
past week against the dollar -- saw the cost of hedging against near
term uncertainty rise. In fact, Monday's rise in implied volatility,
especially near term, puts it on track for its biggest rise since
just before the 2010 general election.
Two-week sterling/dollar implied volatility -- straddling the date
of the vote -- has more than tripled, rising to trade at 12 percent
on Monday, traders said.
It was much higher than the one-month implied volatility for
sterling/dollar which rose to about 9.5 percent, its highest level
since July 2013.
Two-month implied volatility also rose, but much less than the
one-month, highlighting concerns about the short-term aftermath from
a potential "Yes" vote.
"It is the near-term fallout that is leading hedge funds to seek
protection," one options trader at a UK bank said. "The longer term
investors -- the real money investors -- have so far been on the
sidelines."
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BIAS FOR WEAKER POUND
Until early August most investors were bullish about the pound,
given solid UK economic data and expectations that the Bank of
England could be the first major central bank to lift interest rates
from record lows.
Some of those bets have been unwound as wage inflation is still
subdued, but it is the underpricing of a possible Scotland exit is
what is driving the market, traders said. Those concerns have also
hit rate hike chances.
One-month sterling/dollar risk reversals, measured in vols, and a
gauge of demand for options on a currency rising or falling, were
showing their highest bias for sterling <GBP1MRR=> weakness against
the greenback in more than two years. They were trading at 1.8 vols
in favor of sterling puts, or bets the pound will weaken.
One-month euro/sterling risk reversals, which flipped to show a bias
for sterling weakness against the euro last week were also showing a
greater skew for further pound losses.
One-month risk reversals, were trading at 0.4 vols in favor of euro
calls, or bets the single currency will rise. To put that in
perspective, the euro has been under pressure ever since the
European Central Bank cut rates to new lows and launched an asset
purchase program last week.
But it has risen against the pound, having already gained more than
1 percent this month.
(Editing by Louise Ireland)
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